Securities Law Commons^™

Choosing Among Innocents: Should Donations To Charities Be Protected From Avoidance As Fraudulent Transfers, Jeffrey Davis

Jeffrey Davis

In recent years, the nation has experienced the most severe recession since the Great Depression of the 1930s. A recession is like a low tide. When the water recedes, the crabs, slugs, and urchins appear. Similarly, when the economy recedes, Ponzi schemes appear. People cut back on saving and investing, and many are forced to draw on savings and investments. Deprived of its life's blood, a positive cash flow, a Ponzi scheme dies. This explains why so many Ponzi schemes have failed recently, including the schemes of Bernard Madoff in New York, Tom Petters in Minneapolis, Robert Allen Stanford in …

Tender Offers And The Sale Of Control: An Analogue To Determine The Validity Of Target Management Defense Measures, Stuart R. Cohn

Stuart R. Cohn

The hostile tender offer phenomenon has spawned wholesale defensive measures adopted by target company management. In recent years, confrontations like those of Occidental Petroleum-Mead Corporation and American Express-McGraw-Hill have resulted in target management causing the eventual withdrawal of the tender offer by employing a variety of defensive measures known colloquially as “scorched earth” tactics. The “urge to merge” among major corporations will continue to produce unsolicited, nonnegotiated tender offers at varying scales of size. Consequently, strategies and techniques have been created at a pace faster than the process of litigation, causing a discernible lag between the ingenuity of corporate management …

Stock Appreciation Rights And The Sec: A Case Of Questionable Rulemaking, Stuart R. Cohn

Stuart R. Cohn

A stock appreciation rights (SARs) program is a form of deferred incentive compensation. Grantees are awarded SAR-units representing an equal number of the grantor’s equity shares currently being traded in public markets. SARs provide grantees the benefit of stock ownership without equity interest, investment, or risk of loss. Stock appreciation rights programs offer various advantages over other forms of executive compensation and have grown rapidly in number. These advantages include the availability of benefits without the requirement of monetary payments, the utilization of SARs as an interest-free form of financing the purchase of stock under tandem stock option programs, the …

Securities Markets For Small Issuers: The Barrier Of Federal Solicitation And Advertising Prohibitions, Stuart R. Cohn

Stuart R. Cohn

How can small issuers find potential investors and stay within the confines of federal securities laws? That is a perplexing question given the very strong prohibitions against advertising and solicitation found in SEC rules and no-action letters. What the registration exemptions purport to give with one hand, i.e. ability to raise capital without the cost and delay of registration, the anti-solicitation rules take away with the other. These rules need to be lifted or modified if small businesses are to have a viable opportunity to seek potential investors.

Demise Of The Director's Duty Of Care: Judicial Avoidance Of Standards And Sanctions Through The Business Judgment Rule, Stuart R. Cohn

Stuart R. Cohn

Courts love the so-called business judgment rule. It dispenses quickly and easily with derivative actions against corporate directors and officers, and other challenges to corporate conduct. Unfortunately, the business judgment rule has come to mask its underlying premise, i.e. that there must have been a business judgment made. This article examines the dominance of the business judgment rule over the underlying requirement of the duty of care and suggests reform measures that will bring the duty of care back to its appropriate role in determining the merits of management decision-making processes.

The Impact Of Securities Laws On Developing Companies: Would The Wright Brothers Have Gotten Off The Ground?, Stuart R. Cohn

Stuart R. Cohn

Suppose the Wright brothers, to pursue their dreams of manned flight, needed outside financing. Confronted with the intimidating regulatory requirements of today 's state and federal securities laws, would they ever have gotten off the ground? With historical illustrations, this Essay presents an entertaining look at the serious problems that would be encountered today by entrepreneurs who have ideas but need capital to develop them. It analyzes the regulatory maze and prohibitions of state and federal securities laws and concludes that, in today's marketplace, the Wright brothers probably would have violated several laws to obtain essential financing for their venture.

E-Commerce, Cyber, And Electronic Payment System Risks: Lessons From Paypal, Lawrence J. Trautman

Lawrence J. Trautman Sr.

By now, almost without exception, every business has an internet presence, and is likely engaged in e-commerce. What are the major risks perceived by those engaged in e-commerce and electronic payment systems? What potential risks, if they become reality, may cause substantial increases in operating costs or threaten the very survival of the enterprise? This article utilizes the relevant annual report disclosures from eBay (parent of PayPal), along with other eBay and PayPal documents, as a potentially powerful teaching device. Most of the descriptive language to follow is excerpted directly from eBay’s regulatory filings. My additions include weaving these materials …

Ice Skating Up Hill: Constitutional Challenges To Sec Administrative Proceedings, Thomas Glassman

Thomas S Glassman

Since the inception of the Dodd-Frank Act the Securities and Exchange Commission has come under fire for its increased use of administrative proceedings in adjudicating the agency’s enforcement actions. That criticism has come to several suits in federal court claiming constitutional challenges to the system generally and most recently, the Administrative Law Judges themselves. Until June of 2015, when Hill v. the SEC took place in federal court, the Government was unbeaten in when arguing against these constitutional challenges. Hill, however found that it was likely the SEC had hired their Administrative Law Judges unconstitutionally. The SEC Administrative Law Judges …

Democratizing Startups, Seth C. Oranburg

Seth C Oranburg

The Jumpstart Our Business Startups Act of 2012 intends to “help entrepreneurs raise the capital they need to put Americans back to work and create an economy that’s built to last.” The goal is to “democratize startups” by making capital available to diverse entrepreneurs in new geographies. Yet the net effect of securities regulations and market conditions is the opposite. Startup companies are encouraged to stay private so capital is consolidating in large, mature firms instead of recycling into new startups. Evidence of consolidation is that once-rare “Unicorns” (billion-dollar startups) now number over 111. More money is going into huge …

Plausible Cause: Exploring The Limits Of Loss Causation In Pleading And Proving Market Fraud Claims Under Securities Exchange Act Section 10(B) And Sec Rule 10b-5, Robert N. Rapp

Robert N Rapp

This article explores the critical role of loss causation in pleading and proving fraud-on-the-market claims in private actions under Section 10(b) of the Securities Exchange Act of 1934 and SEC Rule 10b-5 thereunder. Loss causation is a separate, essential, element of any private action under these provisions, and weighs heavily on securities fraud class actions brought under the fraud-on-the-market theory. Claims in these cases are based on a security market price said to be made artificial by reason of materially false or misleading information disseminated into an efficient market, and which resets to a correct level when a disclosure event …

The Law And Ethics Of High-Frequency Trading, Steven R. Mcnamara

Steven R. McNamara

Michael Lewis’s recent book Flash Boys has resurrected the controversy concerning “high-frequency trading” (HFT) in the stock markets. While HFT has been important in the stock markets for about a decade, and may have already peaked in terms of its economic significance, it touched a nerve with a public suspicious of financial institutions in the wake of the financial crisis of 2008-2009. In reality, HFT is not one thing, but a wide array of practices conducted by technologically adept electronic traders. Some of these practices are benign, and some even bring benefits such as liquidity and improved price discovery to …

Broker-Dealer: A Fiduciary By Any Other Name?, William Alan Nelson Ii

William Alan Nelson II

Broker-dealers, unlike investment advisers, are not regulated as fiduciaries when providing investment advice, even though broker-dealers are holding themselves out as financial advisors and offering virtually identical services to investors. The lack of consistent regulation of financial service providers arises from the structure in which advice historically has been delivered. Financial services regulation since the Great Depression has developed along roughly dual tracks: laws governing the sale of financial products, which may or may not require that the products be suitable for the customer, and laws governing investment advice, which impose a fiduciary requirement on the adviser to act solely …

The Vanishing Supervisor, James A. Fanto

James A. Fanto

This Article begins with two stories that are emblematic of related trends in broker-dealers: the importance of compliance officers and the significance of technology for the oversight of brokers and their activities. The stories also point to the lessening role of the supervisor who is “on the ground” in the branches of these firms. The diminished position of the mid-level supervisor is surprising, even shocking, in the federal regulation of broker-dealers. The history of this regulation reveals that Congress, the Securities and Exchange Commission (“SEC”) and self-regulatory organizations (“SROs”) like the Financial Industry Regulatory Authority (“FINRA”) sought to prevent broker …

Take It Or Leave It: Unconscionability Of Mandatory Pre-Dispute Arbitration Agreements In The Securities Industry, William Alan Nelson Ii

William Alan Nelson II

The pervasive use of mandatory pre-dispute arbitration agreements in the securities industry is a relatively new phenomenon. However, research reflects that an overwhelming majority of retail brokerage and investment advisory agreements include language requiring that all disputes between the customer and the broker-dealer / investment adviser be resolved through arbitration – most often with Financial Industry Regulatory Authority (FINRA) Dispute Resolution. Thus, only in rare instances can an investor open either a brokerage or investment advisory account without agreeing to submit to mandatory pre-dispute arbitration.

The enclosed article is the first to focus on the fairness of mandatory pre-dispute arbitration …

Managing Cyberthreat, Lawrence J. Trautman

Lawrence J. Trautman Sr.

Cyber security is an important strategic and governance issue. However, because most corporate CEOs and directors have no formal engineering or information technology training, it is understandable that their lack of actual cybersecurity knowledge is problematic. Particularly among smaller companies having limited resources, knowledge regarding what their enterprise should actually be doing about cybersecurity can’t be all that good. My goal in this article is to explore the unusually complex subject of cybersecurity in a highly readable manner. First, an examination of recent threats is provided. Next, governmental policy initiatives are discussed. Third, some basic tools that can be used …

The Alternative Investment Market: Helping Small Enterprises Grow Public, Jonathan R. Hornok

Jonathan R. Hornok

The Alternative Investment Market (“AIM”) of the London Stock Exchange is a twenty-year experiment in light securities regulation for small companies. The empirical literature shows that the AIM underperforms premier exchanges; however, this literature should not be taken as evidence that the AIM experiment is a failure, rather that the AIM serves a unique niche. In contrast to companies listing on premier exchange, those listing on the AIM do not undergo significant changes in ownership, control, and leverage after an initial public offering (“IPO”). Instead, these changes occur over time, if the company grows. This Article argues, based on the …

The Bankruptcy Of The Securities Market Paradigm, Stephen P. Wink

Stephen P Wink

The current paradigm of securities market regulation in the United States rests on the Efficient Market Hypothesis, a theory that has been largely discredited by modern economics and behavioral finance. The Efficient Market Hypothesis assumes that the price of securities in the market accurately incorporates and reflects all available material information. Building on this notion, regulators have assumed that better information leads to healthier markets—and therefore regulation that enhances disclosure and transparency leads to healthier markets. Over time, this reasoning has elevated these tools, disclosure and transparency, to ends in themselves, despite the flaws in the Efficient Market Hypothesis. Although …

Are Investors’ Gains And Losses From Securities Fraud Equal Over Time?, Alicia J. Davis

Alicia Davis

Leading securities regulation scholars argue that compensating securities fraud victims is inefficient because diversified investors that trade frequently (generally, institutional investors) are as likely to gain from trading in fraud-tainted stocks as they are to suffer harm from doing so. In other words, institutional investors have no expected net losses from fraud over the long term and are effectively hedged against fraud risk. Moreover, individual investors can protect themselves from fraud, as well, by investing through diversified institutional intermediaries. In this Article, I demonstrate, using both probability theory and observational and computer-simulated trading data, that the argument of the compensation …

The Institutional Appetite For Quack Corporate Governance, Alicia J. Davis

Alicia Davis

This Article offers evidence that higher quality internal corporate governance is associated with higher levels of ownership by institutional investors. This finding is consistent with the idea that institutions have greater reason than individual investors to prefer well-governed firms, but surprising given the substantial empirical evidence that casts doubt on the efficacy of internal governance mechanisms. The study described in this Article also finds that higher quality external governance is associated with lower proportions of ownership by certain types of institutional investors, also a somewhat surprising result given available empirical evidence on the positive relationship between external governance and firm …

Stock-Market Law And The Accuracy Of Public Companies’ Stock Prices, Kevin S. Haeberle

Faculty Publications

The social benefits of more accurate stock prices—that is, stock-market prices that more accurately reflect the future cash flows that companies are likely to produce—are well established. But it is also thought that market forces alone will lead to only a sub-optimal level of stock-price accuracy—a level that fails to obtain the maximum net social benefits, or wealth, that would result from a higher level. One of the principal aims of federal securities law has therefore been to increase the extent to which the stock prices of the most important companies in our economy (public companies) contain information about firms’ …

Canadian Stock Exchange Checklist, Tiffany C. Walsh

Tiffany Walsh J.D., B.Comm.

Checklist for a public listing on the Canadian Stock Exchange via IPO.